Europe

11:45 am

Fri October 21, 2011

Hamilton's Lesson For Europe: Pay Your Debt

Because of Alexander Hamilton's insistence that the United States pay off its debt, investors came to see the nation as a stable place to do business, biographer Ron Chernow says.

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This weekend, French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet in Brussels with other European Union leaders. Their goal: to settle on a plan to pay the debts of struggling member nations.

Their meeting might go better if Alexander Hamilton's ghost could get a seat at the table.

Hamilton, one of the United States' Founding Fathers, was the fiscal genius who insisted that paying off debts of this union's member states would lead to economic greatness.

"Hamilton thought it was important to have a clear and convincing plan to pay off creditors," author Ron Chernow said in an interview.

He said that in 1789, Hamilton — the nation's first Treasury secretary — began pushing to pay off the Revolutionary War debts of the federal government, as well as the states. Congress owed its creditors about $54 million, and the 13 states collectively owed about $25 million, Chernow said.

Creditors feared the young Congress and states would not be able to pay the combined $79 million, a staggering sum in those days. "We were in worse shape than Greece," Chernow said. "This debt threatened to crush the government."

But Hamilton, with the strong backing of President Washington, refused to consider default. Hamilton consolidated debts and promised that Congress would raise taxes high enough to pay them off. Persuading lawmakers to go along wasn't easy. "It was very, very tempting to repudiate the debt" to avoid raising taxes, Chernow said.

But Hamilton and Washington insisted. "They wanted the United States to be taken seriously as a grown-up country," Chernow said. "They repudiated the idea that we would be a third-world country. And paying off debt became the basis of our success" because investors came to see the United States as a stable place to do business.

"A lot of people were surprised that this brand new country would honor its debt," Chernow said. "We would not have emerged as a great nation if Washington and Hamilton had not insisted on paying off debts."

Today, the United States is struggling to come to terms with its nearly $15 trillion debt, and recently came to the brink of default in a battle to raise the debt ceiling. And the parallels between the fledgling United States and the still-young European Union should not be overstated. But there are some similarities.

In its earliest days, the United States was a sort of large free trade zone, comprised of 13 states controlled by their own legislatures. There was no unified monetary policy set by a central bank.

The European Union is a 27-nation bloc that functions as a free trade zone. It has a parliament that attempts to coordinate member-nation policies to create a single, powerful economic entity. Since 1999, the 17 core EU countries have shared a common currency, called the euro. It is used by about 327 million Europeans — slightly more than the number of Americans who use the U.S. dollar.

But EU members remain separate nations, with their own governments that can borrow and spend. Some of those nations, particularly Greece, Spain, Portugal, Italy and Ireland, have borrowed more than they can now repay.

Some economists argue that these countries should raise their own taxes and cut spending enough to repay creditors, or default on their debts. A country that fails to pay its debts may find itself frozen out of credit markets for decades, a tough punishment.

But others say any one default could trigger a chain reaction of many defaults throughout Europe, as well as bank failures. That could destabilize the entire continent's financial system and throw the common currency into chaos.

So in Brussels, home of the European Parliament, the leaders will be meeting this weekend, trying to decide how to best restructure the various sovereign debts via the European Financial Stability Facility, a $605 billion bailout fund.

Any real solution is bound to involve unpopular new taxes and spending cuts to help pay down the bills. The prospect of more austerity measures already is causing social unrest. In recent days, Greece has been roiled by strikes and protests involving tens of thousands of people. The decisions that will be made by these leaders could shape the economic future of Europe for decades, perhaps centuries. They will be judged by history.

Chernow offers no advice to Europe's leaders. But he notes that on this continent, the Founding Fathers' decision to buckle down and pay all debts laid the base for building the world's greatest economic power. "You know, it worked," he said.

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